Does increasing supply 'per-se' really assist in the provision of affordable accommodation?

8/02/2013

When I first arrived in Australia from a relatively small town in the UK, the high-rise developments that were starting to dominate the inner CBD skyline provoked a sense of excitement. The thought of residing in one evoked pictures of sweeping views, a kind of modern day luxury ‘hotel’ with a concierge and roof top gym. I was still coming to terms with the local real estate landscape and my concept of what created an ideal ‘home’ for an Australian buyer was bias in the extreme.

I had numerous pre-conceived ideas formed by my experience of the UK housing market – one of which was the difficulty in adapting to the thought of living in a weatherboard house. To my UK ‘cold climate’ brain, living in a house made of wood was a concept that should have died out with the war. I now deal with a proportion of property buyers who will only consider a weatherboard dwelling – no doubt tying it in with their own concept of what makes a ‘home’ – usually envisioning an attractive Californian bungalow or single block fronted Victorian.

My first ‘real’ experience of high-rise accommodation didn’t disappoint. It was the ‘Royal Domain’ development in Melbourne – one of the ‘up market’ dwellings close to the top floor of which I was granted a private inspection. The apartment itself was fairly ordinary – had I walked through at ground level and been given the asking price, I’d have baulked at the offer. The fittings and fixtures were lacking in quality for the buying demographic it aimed to attract – not that you would have noticed – the main attraction was the view. I joked to the agent at the time that should I live there, I wouldn’t bother with a TV – I’d buy a good pair of binoculars instead. It promised to be far better entertainment.

The million dollar ‘plus’ price tag was one thing, the owners corporation fees another. Eighteen thousand a year – clearly to be expected considering the block size and additional on site ‘features’ – but despite the agent spruiking the developments ‘investment potential’ it didn’t require real estate experience to assess it was about as good an ‘investment’ as a retirement home.

The apartment above sat vacant – it had been purchased by an off-shore businessman from China who only occupied it for events such as the Grand Final or Melbourne’s Spring Cup. The market for this particular type of property was discretionary at best, and anything but consistent.

I’ve written numerous columns addressing the inadequacies of our high-rise culture in addressing the need for affordable accommodation. The reason I do so today, is in response to a debate I had with the ACTU’s Matt Cowgill who took up the challenge to express the broadly shared logic that increasing supply ‘per-se’ is the answer to a growing demand for affordable, well located, accommodation.

Matt used different priced potatoes to demonstrate his well established economic theory of ‘supply vs demand.’

“..there are three types of potatoes: kipfler, desiree, and regular. Kipflers are expensive and not that common, whereas regular potatoes are cheap and plentiful. Desirees are somewhere in the middle.”

“What would happen if some kind of bug struck the supply of kipflers, halving it overnight?”

Matt pondered, and in doing so, demonstrated that potato lovers would turn their demand to the closest equivalent – whether it be settling for a ‘regular’ type or moving from a ‘Kiplers’ potato consumer, to a ‘Desiree’ potato consumer.

Needless to say, Matt’s theory is that property markets are connected and therefore fulfilling the needs of the ‘affluent’ will reduce competition at the lower end of our market arena making sure supply is readily available for the intended ‘price’ demographic. In this particular discussion, we were using the abundance of new tower blocks in Melbourne as the proposed property ‘type’ example.

The theory when used with potatoes is sound – if I was shopping in my local supermarket and a certain brand of vegetable I needed for my evening meal were unavailable, I would settle for ‘the next best thing’ – whether higher or lower priced - and ‘make do.’ If a good supply were available I may choose a more expensive brand, thereby leaving a greater supply of the ‘regular’ type for those shopping with a lower budget. My choices, if consistent enough and mirrored for a long enough period of time by a large enough demographic of consumers, would evidently bear an effect on the price – the assumption is more supply equates to lower demand and a lower price.

Therefore, why doesn’t the theory hold with our current CBD ‘high-rise’ supply of property? And more importantly, why are a large proportion of our towers sitting empty, with vacancy rates in the region of 8 – 10 % (SQM) and rents that hardly offer ‘affordable’ value when compared to the established terrain?

Let me offer my own analogy - If a devastating tornado hit my local neighbourhood and I found myself without a roof over head I would also ‘make do’ – however that’s not the reality of our buying market. Most home buyers work devilishly hard to save an initial deposit and therefore expect to see their somewhat ‘pre-conceived’ idea of ‘value’ represented in their purchase.

Whether you think a property buyer’s demands are unrealistic or not is irrelevant - we’re talking about a ‘consumer’ market, not desperate homeless individuals who are prepared to bid on any old thing just because it fits into their budget. Therefore, if additional property is going to fulfil the needs of home-buyers – (or for that matter renters – assuming renters are also looking for a ‘home’) - it needs to be done so with that intention initially.

I’ve since inspected numerous high-rise/high-density developments – both in the CBD and the inner and middle ring suburbs where new apartment blocks are commonly 5 stories or more. Some are impressive in design – however, the majority are a huge disappointment. The quality of construction often shows ‘cracks,’ and has clearly been developed to a strict ‘squeeze as many in as possible’ budget.

The reason I’ve walked through so many, is because I deal with clients from all ranges of the property buying spectrum – covering budgets of $300,000 to $3million + and spanning a broad range of individual buyer ‘types,’ The overwhelming conclusion remains, that this type of property was not built with the home buyer in mind, and due to the lack of diversity in supply, fails to attract many local investors either.. a point I’ll expand upon below.

A proportion of buyers come to me with ‘high-rise’ (and a view) solidly envisioned, however even if they have a discretionary budget to allow a purchase in one of the better quality developments, once presented with the alternatives their finance will allow – such as a period terrace or townhouse - along with an assessment of the fees and ‘drawbacks’ high-density apartment living necessitates, their initial preference pales in comparison.

Obviously, most local home buyers prefer houses to apartments – and for the ‘high-rise’ price tag of a 2+ bedroom apartment, there’s far more ‘bang for buck’ in established accommodation which doesn’t come hand in hand with the additional risks of the view being built out, a queue to get out the car park during peak hour traffic, the extortionate owners corporation fees and 150 immediate neighbours the majority of which are renters (many students) transitioning through various stages of their property ‘career.’

For lower budget buyers - unlike the bulk of new stock on offer - our older established apartments seem to have been built with the ‘home buyer’ in mind and are therefore more attractive - usually offering larger floor plans in smaller block sizes. Therefore when ‘home buyer’ apartment shopping does occur, this is the type of accommodation that’s generally preferenced. Hence why the majority of ‘home buyers’ prefer established over new. They can get better ‘bang for their buck.’

As for first home buyers shopping with a budget in the $300,000s – let me quote from one such buyer who had a vision of her first home being in an inner-city ‘high-rise’ or ‘high-density’ development due to her desire to situate in the CBD.

“..the latest trend in Melbourne is to build tiny New York-style apartments and then charge amazingly high prices for them. Most of the places advertised in or near the city for $350,000 or less are in student housing buildings and boast two small cupboards that might just accommodate a single bed each, and a slim hallway which doubles as a kitchen and living area..... In this sub-$400,000 price range, a L-A-R-G-E two-bedroom apartment is considered to be 44.5sq m, which would make an excellent studio apartment or a reasonable one-bedroom apartment”

The author is now fully aware that $350,000 for the ‘new’ (or even 10 year old) supply on offer is not ‘value for money,’ – yet a few suburbs out, in a different market all together, she can afford an established comparatively larger apartment with good proximity to shops and train station, with the substantial cash advantage of being devoid of the high owner corporation fees which fund a swimming pool she’d have probably have been too busy to use. It just required a little guidance to open her eyes to established alternatives she is prepared to settle for.

If by chance she had found a high density ‘L-A-R-G-E’ apartment suited to her lifestyle, she may have come down with a bump when trying to acquire finance – it’s well known banks have strict lending criteria for first home buyers trying to purchase small apartments in high-density accommodation. Each lender has their own restrictions relating to internal floor space and most require a larger deposit to offset the risk. Clearly the banks recognise high-density accommodation is not always easy to ‘offload’ in a default situation.

I have no doubt there are exceptions to every rule – and no doubt ‘happy’ high-rise high-density dwellers do exist, but what about Matt’s theory of reducing competition for the lower priced units if the ‘luxury’ or ‘middle income’ price bracket were well supplied?

Well as I pointed out last week – individuals who can afford to invest in property are hardly leaving lower priced stock for the ‘home’ buyers on a compromised budget. Because of our current negative gearing tax benefits – the best established property in our inner suburban market which does appeal to the first home buyer demographic is a hotbed of investor demand, with over 90 per cent opting to place their dollars in this sector. Investors understand, if they purchase properties ‘home buyers’ also desire, the ‘value’ of their property is likely to attract interest throughout all stages of the ‘property cycle’ and therefore speculation is rife. First home buyers are caught out at every inner city hurdle – they face restrictions for new, and somewhat un-equal ‘deepest pockets wins’ competition for established.

So who is benefitting from the abundance of new and ‘proposed’ high-density developments? Well, the typical investor of ‘new’ accommodation is the foreign demographic who face no restrictions when purchasing ‘off the plan.’ In China – unlike Australia, older developments are poorly constructed and undesirable bearing little attraction for home buyers, however the newer developments are highly coveted and when investing here, a similar ‘bias’ is often assumed.

Investors of these developments are seeking a good yield – however, a percentage of foreign investors also allow their property to sit vacant – once again it’s a cultural bias with the mind set of keeping the interior in ‘as new’ condition for a future sale.

If someone can explain to me how building apartment blocks which are nether affordable or desirable for a large proportion of home buyers - and despite our tight rental market, contain a large proportion of units left to sit vacant - can bring down the cost of accommodation or ease a tight established terrane. I’d be the first marching the streets in favour of the plan.

As it is, it seems they were never built for ‘home buyers’ in the first place. A couple of years ago when the ‘boom’ of Melbourne’s’ high-rise construction kicked in The City of Melbourne’s website described the new developments as being “relatively small one and two bedroom apartments largely targeted at the student market and owned by investors.” So has high-rise combated affordability for a diverse property shopping demographic? No – because it was never built with the intention of doing so. Our property market is no longer about home buyers – it’s a money making wheel with every Tom Dick and Harry hoping to make a buck in the process.

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Catherine Cashmore

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Catherine Cashmore has been working in the Australian real estate market for over 14 years.

She has assisted hundreds of home buyers and investors to secure real estate in the best possible location, for the best possible price.

A regular and highly respected commentator across local and international media, Catherine speaks about all aspects of real estate and the economy.

A sought after public speaker and President of Australia's oldest economics organisation, Prosper Australia, Catherine is called upon regularity to interact with policy makers and housing organisations to discuss real estate policy reform. As such she has an in depth knowledge about the Australian real estate market, few can rival.

Working with Philip J Anderson, an international leader on market cycles, Catherine is an expert on the real estate/land cycle and its effects on regional markets around the world.